In a recent address, President Obama boldly declared, “The United States of America, right now, has the strongest, most durable economy in the world.” While the specifics behind this assertion remain ambiguous, we might afford him a moment of optimism. However, it’s important to recognize that such stability is not guaranteed, especially with underlying risks simmering just beneath the surface of this economic veneer.
Current conditions may appear favorable, but they may not last indefinitely. Below the visible bloom of prosperity lies an economic fault line, potentially poised for upheaval. It is not a question of whether an economic shake-up will occur, but when it will strike—regardless of presidential pronouncements.
At the Economic Prism, we harbor no illusions about the U.S. or global economy. We observe numerous absurdities and inconsistencies that signal potential instability. While it’s challenging to predict exactly when these pressures will manifest, they are undeniably lurking.
Understanding the labyrinthine connections and interdependencies within an economy surpasses the capabilities of even the most astute individuals. The causes and effects in economic cycles are complex and often elude immediate comprehension. What seems evident today may not accurately reflect underlying realities.
Not Without Consequences
Take, for example, the Federal Reserve’s decision to quadruple its balance sheet following the 2008 financial crisis while consumer prices remained relatively unchanged. This reality calls the reliability of the Bureau of Labor Statistics’ consumer price index into question. We’re not advocating for or against the CPI; our point is simply that despite an influx of money into the economy, the prices of everyday goods, like a cup of coffee, remain surprisingly low.
The repercussions of these policies have certainly affected various asset classes, particularly U.S. stocks. However, it is crucial to acknowledge that these distortions don’t preclude a sudden rise in consumer prices at some future date. The potential for inflation lies dormant, akin to tinder awaiting a spark. The longer the Fed manages to inflate the economy without immediate repercussions, the more significant the eventual fallout may be.
While the Fed’s actions have led to price distortions that seem to have become normalized, a closer inspection reveals many inconsistencies. An honest day’s work has lost its value, with diligent labor now rewarded at a fraction of its worth. In contrast, the adverse effects of reckless borrowing and financial risk-taking can often masquerade as savvy business practices for extended periods.
Earthquake Economics
In times of economic boom, especially one fueled by the Fed’s cheap credit, individuals with little foresight may prosper. They borrow heavily and gamble on the continued rise of asset prices, blissfully ignoring the potential hazards of their environment. However, these asset bubbles inevitably burst, leading to a decline in prices and an unwinding of gains.
As the economic bubble deflates, those who benefitted from the boom are starkly confronted with reality. The consequences, of course, tend to be far less palatable than the rewards once were. Just ask the U.S. oil shale producers—who were thriving just 18 months ago—when oil prices plummeted below $30 per barrel, far below many producers’ break-even costs.
According to a report from AlixPartners, these producers are currently losing nearly $2 billion each week at this pricing level. This capital misallocation could only happen under misguided central bank policies promoting mass credit. With another slip like this, the President’s claims of having the “strongest, most durable economy in the world” could quickly unravel, paving the way for recession.
And let’s not forget—’the big one’ could strike at any time.
Sincerely,
MN Gordon
for Economic Prism
